- 1. Inventory Costing and Capacity Analysis
2. Inventory Costing Choices: Overview
- Absorption Costing product costs are capitalized; period costs
are expensed
- Variable Costing variable product and period costs are
capitalized; fixed product and period costs are expensed
- Throughput Costing only Direct Materials are capitalized; all
other costs are expensed
3. Costing Comparison
- Variable costing is a method of inventory costing in
whichonlyvariable manufacturing costs are included as inventoriable
costs
- Absorption costing is a method of inventory costing in
whichallvariable manufacturing costs andallfixed manufacturing
costs are included as inventoriable costs
4. Differences in Income
- Operating Income will differ between Absorption and Variable
Costing
- The amount of the difference represents the amount of Fixed
Product Costs capitalized as Inventory under Absorption costing,
and expensed as a period costs under Variable Costing
5. Comparative Income Statements 6. Comparative Income
Statements Three Years 7. Comparative Income Effects Variable
Costing Absorption Costing Are fixed product costs inventoried? No
Yes Is there a production-volume-variance? No Yes Are
classifications between variable & fixed costs routinely made?
Yes Infrequently 8. Comparative Income Effects Variable Costing
Absorption Costing How do changes in unit inventory cost affect
operating income if? Production = Sales Equal Equal Production >
Sales Lower Higher Production < Sales Higher Lower 9.
Comparative Income Effects Variable Costing Absorption Costing What
are the effects on cost-volume-profit (for a given level of fixed
costs and a given contribution margin per unit? Driven by: unit
level of sales
10. Comparison of Alternative Inventory Costing Systems
- Variable Direct Manufacturing Cost
Actual Costing Normal Costing Standard Costing Actual Prices X
Actual Quantity of inputs used Actual Prices X Actual Quantity of
inputs used Standard prices X Standard Quantity of inputs allowed
for actual output achieved 11. Comparison of Alternative Inventory
Costing Systems
- Variable Indirect Manufacturing Cost
Actual Costing Normal Costing Standard Costing Actual variable
indirect rates X Actual quantity of cost-allocationbases used
Budgeted variable indirect rates X Actual quantity of
cost-allocation bases used Standard variable indirect rates X
Standard quantity of cost-allocation bases allowed for actual
output achieved 12. Comparison of Alternative Inventory Costing
Systems
- Fixed Direct Manufacturing Cost
Actual Costing Normal Costing Standard Costing Actual prices X
Actual quantity of inputs used Actual prices X Actual quantity of
inputs used Standard prices X Standard quantityof inputs allowed
for actual output achieved 13. Comparison of Alternative Inventory
Costing Systems
- Fixed Indirect Manufacturing Cost
Actual Costing Normal Costing Standard Costing Actual fixed
indirect rates X Actual quantity of cost-allocation bases used
Budgeted fixed indirect rates X Actual quantity of cost-allocation
bases used Standard fixed indirect rates X Standard quantity of
cost-allocation bases allowed for actual output achieved 14.
Performance Issues and Absorption Costing
- Managers may seek to manipulate income by producing too many
units
- Production beyond demand will increase the amount of inventory
on hand
- This will result in more fixed costs being capitalized as
inventory
- That will leave a smaller amount of fixed costs to be expensed
during the period
- Profit increases, and potentially so does a mangers bonus
15. Inventories and Costing Methods
- One way to prevent the unnecessary buildup of inventory for
bonus purposes is to base managers bonuses on profit calculated
using Variable Costing
- Drawback: complicated system of producing two inventory figures
one for external reporting and the other for bonus
calculations
16. Other Manipulation Schemes Beyond Simple Overproduction
- Deciding to manufacture products the absorb the highest amount
of fixed costs, regardless of demand (cherry-picking)
- Accepting an order to increase production, even though another
plant in the same firm is better suited to handle that order
17. Management Countermeasures for Fixed Cost Manipulation
Schemes
- Careful budgeting and inventory planning
- Incorporate an internal carrying charge for inventory
- Change (lengthen) the period used to evaluate performance
- Include nonfinancial as well as financial variables in the
measures to evaluate performance
18. Income Effects of Inventory Buildup 19. Extreme Variable
Costing: Throughput Costing
- Throughput costing (super-variable costing) is a method of
inventory costing in whichonlydirect material costs are included as
inventory costs.All other product costs are treated as operating
expenses
20. Throughput Costing Illustrated 21. Costing Systems Compared
22.
